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This article was first published in the June 2014 UK edition of Accounting and Business magazine.
Welcome to this sixth series of articles, which deals with international and corporate management. So far these mini MBA series have covered competitive strategy, financial strategy, management theories, marketing, and organisation and people; we now turn to international management and corporate management.
This series will cover:
- what international management is (this article)
- developing international strategies (article 2)
- making effective acquisitions (article 3)
- managing alliances (article 4)
- divestment: breaking up is hard to do (article 5).
International management is the management of business operations in an organisation serving markets and operating in more than one country. It requires knowledge and skills beyond normal business expectations, such as familiarity with local market and competitive conditions, the legal and financial environment, the capability to do multicurrency transactions and managing across borders.
This definition stresses the need for a much more advanced set of skills than managing within national borders. It demands extensive knowledge of local conditions and adaptability.
As with strategic management and management theories, one might visualise international management as running across the more functional areas like marketing, finance and people/organisation.
So what does this all mean? Do you need an international strategy?
What does this mean?
International management can mean a number of things: exporting sporadically to other countries; having a more established export strategy; having international agents, partners, or perhaps a direct sales force in a number of countries; even having supply and/or production facilities overseas; businesses can also make acquisitions abroad, which is a whole new ball game and one in which risks may well compound.
A classic on international management is George Yipp’s Total Global Strategy: Managing for Worldwide Competitive Advantage. Yipp emphasises that developing an international strategy requires the consideration of a lot more than in more run-of-the-mill competitive strategy, for instance:
- To what extent is a market truly global? In other words, is there a single, world marketplace?
- In what respects is the market more, or less, global? It may be possible, for example, to have a global brand but not global production and sourcing operations.
- Some markets will have globally common competitors and some will not. Even when there are global competitors, they may vary hugely in the extent to which they can manage to co-ordinate any attack or defence against you. You will certainly find some huge corporations locked in global combat, such as Coca-Cola vs Pepsi, or Apple vs Samsung, but in many other more globally fragmented markets that will not be the case.
This, in turn, invites the very big questions of:
- Are your markets global now?
- To what extent and how is that the case?
- What are the options for dealing with these opportunities and threats?
- How attractive are these and what are the implications for you in the longer term?
- If you are going to do business internationally, what would your strategic objectives be?
There has been a lot of hype here around markets ‘globalising’ but in reality, as Yipp stresses, a market may be very global in one respect but not in another. For instance, the car market is global in terms of distribution and in some marketing (although incompletely, as domestic manufacturers are still influential), but production still takes place predominantly in the manufacturer’s home country.
In the theory of international management it has always been useful to ‘think global but act local’, as is personified in the (often funny) HSBC adverts, which emphasise the importance of understanding local customers’ culture.
Borders and cultures still exist, but in the internet age and the spread of a common language – we are lucky it is English – they are easier and easier to cross. This is so much so that it is sad not to think about what your international marketplace is – that would be such a good agenda for an away-day for any board!
Picking up the point on strategic objectives above, there might be a number of objectives for having an international strategy:
- Global markets are vast and some are developing very fast. For example, in the BRICS countries (Brazil, Russia, India, China and South Africa), demand is growing while there is poor demand in the West.
- Some products and services have a different appeal as they cross borders. In the Middle East, Africa and Central Europe, for example, executives will pay good money to hear a British academic speak. Some people will still pay very high prices for British cars – that’s Rolls-Royce and Bentley these days (Rover is gone).
- There may be economies of scale.
- Not being there might be dangerous – if a market transforms into a much more global one, then purely domestic operations may be marginalised and become uncompetitive.
A word of warning here is that global expansion which is not tested out through robust strategic analysis can easily destroy rather than create economic value, particularly if margins are reduced to gain entry to the market and the full burden of costs is not allocated in order to make the overseas numbers look good… beware the accountant!
How to begin
The development of any international strategy often begins with something that is very much an ‘emergent strategy’ (see my earlier articles on ‘strategy’ in Accounting and Business). This is when the first moves occur through opportunities presenting themselves; these are then exploited very much as an experiment, with no particularly clear plan in mind. The difficulty comes when this becomes the set pattern – in the words of one client, ‘Yes, I think we do have activities which seem to be in a slightly random set of countries; in truth I think some of our staff just wanted to be in certain countries.’ Another client once told me: ‘It might seem strange that we have a presence in Mongolia but our founder had a big thing about Genghis Khan.’
Clearly such an emergent approach is unlikely to work very well for long. Indeed, the blind urge to expand internationally is one of the destroyers of shareholder value in companies without a solid and sound international strategy.
I still remember running a workshop for a very well-known independent health insurance provider some 15 or more years ago at a most expensive retreat in the Cotswolds. One of the directors was really keen on developing the business’s international strategy. At that point it had no international strategy, and we had just two days to develop a viable model.
I asked them: ‘So by what criteria should we evaluate any strategic options?’
Along the lines of a tailored version of the strategic option grid (see my strategy series), there were five key criteria: the grid is a matrix of all the strategic options (horizontal) against the criteria (vertical) with scores displayed in each cell of the matrix, and the total score for each option.
I argued that we should split ‘strategic attractiveness’ between two criteria: market attractiveness (growth rate, competitive pressure, etc) and potential competitive advantage.
But this particular director didn’t want to apply the second criterion because the business was not actually in any of these markets. I argued that some markets would be more hostile to a British brand, to new entrants anyway, and harder to set up competitive operations in.
At one point it seemed almost as though, without at least the guiding hand of the (then new) CEO, that they would expand far too randomly and too fast. I noticed a globe in the room so I threw myself over it and told them: ‘I don’t care what you can’t see but you are not going here. You are not going to succeed if you do more than two countries a year! As you can’t seem to, I am going to choose for you: you are only going to do two a year!’ As a Dilbert cartoon once observed: ‘Strategy is often about saying no.’
And for the first five or so years that was exactly the business’s rate of expansion, based on the chosen criteria. They now have operations in around 50 countries, carefully cascaded out – it worked!
Next month – more on developing strategies internationally.
Dr Tony Grundy is an independent consultant and trainer, and lectures at Henley Business School